Research Library
Below is our research library, listed in reverse chronological order. Please use the search box to look for research on a specific company or topic, or use the Calendar, Archives, or Sector links at left to browse for research from a specific time period or sector. If you are a Wolfe Trahan client and can not access any of the links in our library, please contact to request our PDF decryption plug-in.CP: Modestly Reducing EPS As Floods Subside
On Tuesday, CP announced the reopening of the mainline across southeastern Alberta and southwestern Saskatchewan after the extensive flooding last week that forced the closure of the southern mainline for 11 days. Last week’s flooding caused multiple track washouts as well as significant damage to embankments along CP’s mainline.
Time To Throw Out Your Textbooks …
It may be just a mere a coincidence, but the news that U.S. 2-year yields hit a record low the same day that Japanese bonds reached a 7-year low is very telling. Indeed, there are many similarities between the U.S. and Japan in 1990s and even the U.S. today and the U.S. in1950s & 1960s. Where there is less comparison, at least in terms of the relationship between financial markets and economic data, is the U.S. during the 1980s and early-1990s. In that period, a multi-year disinflationary trend played a key role in how financial markets behaved. Many textbooks are written using the past 30 years as the sample data set to explain the interaction of economic trends (i.e., inflation) and equities. For example, inflation often gets a bad rap when brought in the context of equity markets and “fair value”. Most text books will tell you that there is an inverse correlation between the P/E of a security and inflation. During the 80s and 90s this was mostly true – inflation declined as P/Es expanded. However, looking at the relationship prior to 1980 (and post-1998) tells a very different story.
The chart above goes against what we were taught in school – that when inflation declines, a higher P/E multiple is warranted. While there is an ongoing debate about the inflation illusion and how equity markets correctly or incorrectly discount inflation into the valuation equation, the fact is that the majority of empirical data show that lower interest rates is consistent with lower P/E multiples for the market.
The message from both the bond and stock market is that growth is going to slow in the coming year. This puts the sustainability story at risk at the same time the economy lacks a “policy backstop” to help support/sustain economic activity. We are now starting to think about what the Fed or the government will do next? We hope policy makers will be somewhat proactive and the market won’t have to once again force the “invisible hand”. The 2-handle on the 10-year should be a wake up call.
FDX: Favorable Ground Contractor Ruling For FDX
Yesterday, Judge Miller, the MDL judge in South Bend, granted FDX’s motion for partial summary judgment on procedural grounds, and dismissed the plaintiff’s ERISA claims without prejudice. The dozen or so plaintiffs represented a national class of some 27K Ground contractors.
Inside Freight: 2Q Airfreight & Logistics Preview – Volumes Generally Peak Above Prior Expectations
We generally expect in-line or upside A&L reports into peaking vols, lower fuel prices and improving pricing trends. We see the most upside relative to Cons. for AAWW and FWRD and expect CHRW to struggle again to make Cons.
The Outlook Ahead … Or … LookOut Ahead?
The list of series arguing for softer leading indicators ahead is getting longer and longer. In fact, it is now almost unanimous as virtually everything we can find that is coincident or anticipatory of leading indicators is pointing downward at this juncture. The latest to join the fray is the percentage of positive revisions on S&P 500 stocks. This is a key one because it often acts as a barometer of market sentiment and we expect our cautious thesis will become an easier sell in light of these developments. Interestingly, this series just witnessed the biggest one month drop ever and our forward-looking work argues it is the “beginning” of a new trend and not a fluke.
So how do we get out of this? Well, there’s an old saying that states we must resolve the initial problems before we can move forward. We’re not sure if that is true but if this is legitimate then we will need to see stronger housing activity before we can enter some sort of sustainable uptrend in equities. The one element that is really interesting with housing is that it is a tiny slice of GDP but it’s influence is enormous via its impact on consumer confidence (wealth effect) and business confidence (banking system). The government’s policies were designed to make things better in the near-term (housing tax credit) but it came at the expense of sustainability.
Meanwhile, the path to a better market still lies abroad. Indeed, we will need (hope?) to see rate cuts in the countries that can afford to do so for leading indicators of the economy to revive. The issue here is one of timing. Central banks that could technically cut rates are currently in tightening mode. Softer leading indicators in those economies will eventually sway the minds of central bankers but this will take time. Still, it is one of the limited options we now have to bank on in order to see leading indicators move higher. Note that Taiwan raised rates last week and became the 16th central bank to do so this year. We might just get more QE in the U.S. before China et al. cut rates!
ABFS: Raising Rating to Outperform as Risk/Reward Becomes More Favorable
ABFS’s stock is down 37% since recent highs in April compared to the remainder of our LTL coverage (ex-YRCW) down 12% and the S&P 500 down 11% during that period. ABFS has underperformed as it was unsuccessful in reducing wage costs (the Teamsters voted down ratification of an agreed upon 15% wage cut) relative to the other carriers and reported worse results.
2Q Earnings Preview: Strong Reports Unlikely to Push the Group to New Highs
Signs of Slowing Global Vehicle Production Growth. Sales and production SAARs for the major vehicle markets we track (90%+ of the global industry) declined 2% and 1% sequentially in 2Q:10 on our ests; representing the first time sales and production rates have not risen sequentially since 1Q:09 and 2Q:09. Production rates up 33% y/y likely remained high enough to lead to continued strong 2Q earnings and near-term stock performance. However, slowing production growth is likely to pressure sector valuations, presenting downside risk following 2Q earnings.
Friday Freight
This weekly report summarizes the most recent views and research of Wolfe Trahan. Included are (1) three to five snippets or key takeaways from our team’s recent channel checks with traffic managers about their experiences with purchasing, competition, and service from Airfreight and Logistics, Rail, and Truck capacity providers; (2) notices of upcoming industry events; (3) key takeaways from some of our notes from the past week; (4) recent stock performance for our transport universe; (5) updated comparison tables for the airfreight and logistics group, railroads, and trucking; and (6) fuel trends for West Texas Crude Oil, On-highway diesel, Rail diesel, and Jet fuel.
On Track, Week 24 Ending June 19: Volume Growth Decelerates Slightly on Tougher Comp and Sharp Drop-off in Grain
Total Week 24 Rail vols increased 16.8% y/y, modestly decelerated from +18.0% last week and +17.7% QTD. Note that y/y comps will gradually become tougher as the year progresses as vols bottomed at this time a year ago. On top of tougher comps, vols dipped 0.8% sequentially on the week, led by a sharp 12% w/w decline in grain vols. Vols fell most sequentially for CSX and the Canadian rails.
CSX: Another STB Rate Case Against CSX
Last week, M&G Polymers filed an STB rate case against CSX, seeking reduced rates for the movement of chemicals between 69 origin-destination pairs. The case will be tested under the STB’s stand-alone cost test for large rate cases. After its ten-year contract with CSX expired at the end of C08, M&G alleges that its current tariff rates with CSX produce revenue/variable cost (R/VC) ratios of 260%-550%, well above the 180% regulatory threshold.
